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Bank of America sets cutoff for redeeming California IOUs

The bank warns it will halt the transactions after July 10. Some other big financial institutions follow suit.

July 03, 2009|Tom Petruno

Bank of America Corp. set the tone for the banking industry's response to California's decision to issue IOUs.

That message, essentially, is this: "We'll help you for a week. If you can't get your act together and nail down a budget by then, you're on your own."

Bank of America announced late Wednesday that it would redeem in full the state's IOUs (formally, "registered warrants") from current BofA customers who want to cash them in. But the bank set a cutoff date of July 10.

On Thursday, other big banks including Chase, Wells Fargo & Co. and Union Bank followed BofA's lead, saying they'll cash the IOUs from customers only through July 10.

Some banks, including City National, didn't set a cutoff date, but they didn't preclude doing so at some point. Many credit unions also have agreed to accept the IOUs from customers without setting a time limit, the California Credit Union League said.

The big banks' hardball strategy will create hardships for their customers if no budget deal is struck soon and the state continues to issue IOUs instead of checks. The state set a redemption date of Oct. 2 for the IOUs, although it said it might redeem them before then if it has the cash. Other lenders may step up to buy the IOUs in the interim, but probably at a discount to face value, unlike the big banks' redemption programs.

When asked why it set such a narrow window for customers to cash IOUs, BofA cited the "operational and financial" challenge of accepting them.

In an e-mailed statement, the bank referred to "the last time the state issued registered warrants in 1992, where the longer the registered warrants were accepted, the longer it took the Legislature to resolve the matter. So, we don't want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible."

Asked whether it might extend the July 10 deadline, the bank all but ruled out doing so, saying, "This is a firm date for us."

Note that banks will earn something for their troubles: The state will pay an annualized 3.75% tax-free rate of interest on the IOUs until it redeems them.

If recipients of the IOUs don't need the cash right away -- which might be hard to imagine in this economy -- they can hold on to them until the state finally pays up. They'd collect whatever interest has accrued to that point.

At 3.75% -- and tax-free -- the interest is far better than what you'd earn on short-term savings in a money market mutual fund . . . or at a bank.

--

tom.petruno@latimes.com

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